Here are three stories that caught our eye this week:
1) Spotify Is Crushing It
What a difference six months makes.
Spotify is up 70%+ this year. And smashing its peers and indexes (see below).
Why? Because it focused on making money — a.k.a being a real business.
Longtime readers know about Spotify well. We’ve highlighted them in several missives. Calling out their not-so-ideal business model back in 2023.
Here’s what we said:
“Good products or services don’t always make good investments…
There really isn’t a musician or podcaster who doesn’t post their music or podcast on Spotify.
Spotify is the global market leader — with 31% market share according to Forbes. Apple Music is second with 15%.
Spotify has almost 500 million monthly active users — 41% of which are premium subscribers paying a monthly fee for no ads. It generated almost $12 billion in revenue in 2022.
COVID-19 accelerated the streaming trend. The number of podcast listeners jumped 40% globally in the same period, according to EMarketer estimates. Its advertising doubled between 2019-2021 in the U.S. alone, according to PwC.
Analysts project total advertising revenue in the podcasting industry will reach $4.3 billion by 2024.
So what investor wouldn’t be excited about Spotify’s revenue growth and the secular tailwind behind it?
The big issue… Spotify has never made a net profit in its history.”
Spotify’s stock was a dud up until it started focusing on profits.
It rose another 12% after posting Q2 2024 earnings. Spotify — realizing one of the new Wall Street narratives is making money — is being rewarded as such.
Spotify is leaning into ideas that make real money — raising prices and bundles. Subscription prices have gone up twice in the last 12 months and there’s been launches of several new subscription bundles for users.
As long as Spotify focused on what makes money… it’ll continue being rewarded with a higher share price.
Well done Spotify!
2) The Fed Is Pivoting In September
The Federal Reserve pivot is official.
There will be a rate cut in September.
We know this because of forward guidance.
Forward guidance is where the Federal Reserve officials tell the world publicly what they’re thinking (and likely going to do) before their next meeting.
The market hangs onto the Fed officials’ every word. Bonds and stocks both move quickly after a Fed official speech. So these officials know they can move markets by saying anything.
They’ve been steadfast over the past two years in saying they’ll keep rates higher until inflation comes down to their 2% level.
(They did this during the quantitative easing years saying they’ll do whatever it takes to get inflation to rise to 2%. Because the money printer going brrrr wasn’t enough.)
Inflation is still above 3%. Unemployment is at 4.1%, not 5%. But now we’re seeing the first signs of a cut due to forward guidance.
Here’s former president of the Federal Reserve Bank of New York, Bill Dudley, in a Bloomberg op-ed, whose words still hold a lot of weight in the Fed circle.
“I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.
The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policy-making meeting.
For years, the persistent strength of the US economy suggested that the Fed wasn’t doing enough to slow things down. The government’s pandemic-era largesse left people and businesses with plenty of cash to spend. The Biden administration’s vast investments in infrastructure, semiconductors and the green transition boosted demand. Easing financial conditions — particularly a surging stock market — increased wealthier households’ propensity to consume. Containing the resulting inflation, it seemed, would require sustained monetary tightening from the Fed.
Now, the Fed’s efforts to cool the economy are having a visible effect. Granted, wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates. But the rest have generally depleted what they managed to save from the government’s huge fiscal transfers, and they’re feeling the impact of higher rates on their credit cards and auto loans. Housing construction has faltered, as elevated borrowing costs undermine the economics of building new apartment complexes. The momentum generated by Biden’s investment initiatives appears to be fading…
It might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.”
Dudley mentions in the op-ed that the Fed isn’t likely to cut in the July meeting (this week). But his signal is to the market, not the Fed.
The markets have taken note. Discounted all of the economic crosscurrents. And have priced in a 100% chance of a rate cut in September.
Longtime readers know we’ve been in the higher for longer camp since day one. We’ve been spot on. While the markets have gotten it wrong every step of the way — see our missives here and here.
Forward guidance from Fed officials (past and present) are starting to tell us the Fed will pivot in September. We should take note.
3) Major Policy Shift From Southwest
Southwest just changed its seating policy for the first time in 50 years.
It’s moving from open seating to assigned seats.
As a result, Southwest gets to offer premium class options and different pricing plans for red-eye flights. This will help boost revenue.
Elliott is pushing for Southwest to clean up its business. Southwest should be making more and spending less.
Southwest’s most recent quarter showed some improvement: Profits rose. But guidance for revenue and expenses were worse than Wall Street’s expectations.
That’s what led to the policy shift. Elliott was likely the cause. Activist investors always speed up business plans. Although Southwest Chief Executive Officer Bob Jordan said otherwise. From Bloomberg:
“We are completely focused on our plan to transform the airline, transform our financial performance,” Chief Executive Officer Bob Jordan said in an interview. In discussions with shareholders, “far and away the piece of feedback we hear most is, ‘Your results are unacceptable and we want you to perform well.’”
Elliott’s pressure “had no impact whatsoever” on the planned steps or the timing of Thursday’s disclosures, Jordan said. The carrier has been working on “transformational” changes for 18 months, he said, and wanted to disclose some details ahead of work with federal regulators that would have made them public soon.”
Shares rose 5.7% after the news. Meaning investors like the move.
This isn’t just a win for investors. It’s a win for Southwest passengers.
The open seat policy was annoying and chaotic. Win-win.
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DISCLAIMER: This is solely our opinion based on our observations and interpretations of events. This should not be construed as personal investment advice.